Bonds Bounce on Hopes Worst Is Over

A customer deposited Indian rupee currency notes at a bank in Mumbai, Sept. 3.

After a string of failed bond auctions in the past few months, investors might finally be warming up to debt issued by the Indian government again.

An auction of government bonds attracted orders for three times the number of bonds on offer Friday. This could be a sign of better times for the market. Friday’s auction was the first in a month which didn’t require bond underwriters to buy unsold government bonds.

An 11% rebound in the value of the rupee from is all-time low of 68.80 to the U.S. dollar on August 28 has improved the mood of bond investors.

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“The last (Friday’s) issuance shows that investors are returning,” says Prasanna Patankar, a senior vice-president at STCI Primary Dealership in Mumbai, which trades in and underwrites government bonds. “The losses in the bond market were the collateral damage when the rupee fell. Now, as the rupee stabilizes, investors are also becoming more confident.”

Indian government bonds have been a tough sell in recent months as the rupee’s sharp fall against the dollar has undermined confidence in Indian debt. The central bank’s attempt to support the Indian currency by reducing the supply of rupees to the banking system has also caused bond prices to fall sharply.

Underwriters have had to step in to bail out government bond sales in seven of the last 10 auctions. In one of the few successful auctions, the central bank, which manages the government’s bond sales, had to slash the size of the bond auction by one third.

A bond auction is unsuccessful when there are not enough bids above the cutoff price set by the central bank. Primary dealers, who underwrite bond sales for a fee, have to buy any unsold bonds at the cutoff price.

While some appetite for Indian government bonds may at last be returning to the market, investors say they are still worried the government will have to borrow more than it has budgeted for in the current financial year as slowing economic growth has taken a toll on tax revenues.

Still investors have also been given confidence recently by the Reserve Bank of India’s moves to reduce the cash shortage in the banking system. On Sept 26, the central bank, in an unusual move, issued a statement saying it would ensure adequate cash in the banking system. Last week, it put its money where its mouth was by announcing it would buy back up to 100 billion rupees ($1.6 billion) of government bonds. The RBI bought 99.74 billion rupees in bonds on Monday.

“The restart of open market operations is a significant move and helped bond sentiment significantly,” says Siddhartha Sanyal an economist at Barclays Bank PLC in Mumbai.

On Monday, the central bank took another step to help create liquidity and cut one of its overnight lending rates for banks by half-a-percentage point, sending government bond prices sharply higher. Analysts said the move is likely to ease cash conditions in the local banking system, which will make it easier for the central bank to sell government bonds.

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